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Wednesday, February 09, 2011

EV Rebates vs. Tax Credits

Having recently taken a hard look at the cost/benefit of the proposed expansion of federal electric vehicle tax credits up to $19 billion, it naturally caught my attention when I heard that the President was proposing to convert the present system of tax credits into point-of-sale rebates for EVs. Legislation has apparently been introduced to put that into effect, along with a significant expansion of federal grants to manufacturers of EV batteries and other components. Aside from my sense that taxpayers have already subsidized that industry sufficiently for its current stage of development, I have distinctly mixed feelings on the EV tax credit conversion, which seems likely to increase the cost of the program, though it would also increase its fairness.

When the Congress originally established this benefit under the TARP bill in October 2008, it opted for the most conservative of the three main ways it could have provided incentives to purchasers of electric vehicles. First, it chose tax credits rather than cash rebates. That at least provides a time value of money benefit to the government, though it opens the door to a certain amount of fraud. Tax credits also ensure that purchasers must be serious about their investment, since they have to pay more of their own money up front and then wait to recover it when they file their next tax return. But Congress raised the bar even higher by choosing to make the EV tax credits non-refundable. That means that not only must you wait to file your taxes to get the benefit, but the credit cannot exceed your annual tax liability in order to take advantage of the full amount. The last time I checked, that implied that a typical EV buyer would need to earn at least $55,000 per year if single, or $75,000 if married filing jointly--after normal deductions and exemptions. That makes buying an EV with the government's assistance a distinctly middle- to upper-middle-class proposition, at least.

The main advantage of turning the tax credit into a rebate is in making it available to more people, and in the process putting more EVs into the hands of less affluent buyers. That works two ways, by expanding the pool of those who would qualify for the incentive, and also by making it easier for buyers to qualify for financing an EV purchase by reducing the amount that had to be financed. I could envision this putting more people in EVs, sooner than under the current system. Of course that's also its chief drawback, from a taxpayer and federal borrowing perspective. The faster the money is spent, the quicker the deficit grows, or the more taxes must go up--or other programs be cut--to pay for it. It also appears that car dealers are less than enthusiastic about becoming the gatekeepers for this benefit.

Having generally supported the earlier "cash for clunkers" rebates, I was initially somewhat receptive to this idea, even if I didn't see similarly unique circumstances to justify it. However, I'd be a lot more enthusiastic if I thought the change were mainly driven by the imperative to improve our energy security--a logic negated by the paltry amount of oil the first few million EVs will save--instead of shoring up a somewhat arbitrary target that was announced in the recent State of the Union address and has attracted a fair amount of skepticism, including from the car industry that is supposed to execute it. In the end I come down on the side of my fellow taxpayers on this one. Let's leave the tax credit as is and allow the early adopters who qualify for the current version to help bring down the cost of EVs, so that more price-sensitive buyers won't need a $7,500 rebate to afford one later.